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By the end of this section, you will be able to:

  • Understand the arguments for and against requiring the U.S. federal budget to be balanced
  • Consider the long-run and short-run effects of a federal budget deficit

For many decades, going back to the 1930s, proposals have been put forward to require that the U.S. government balance its budget every year. In 1995, a proposed constitutional amendment that would require a balanced budget passed the U.S. House of Representatives by a wide margin, and failed in the U.S. Senate by only a single vote. (For the balanced budget to have become an amendment to the Constitution would have required a two-thirds vote by Congress and passage by three-quarters of the state legislatures.)

Most economists view the proposals for a perpetually balanced budget    with bemusement. After all, in the short term, economists would expect the budget deficits and surpluses to fluctuate up and down with the economy and the automatic stabilizers. Economic recessions should automatically lead to larger budget deficits or smaller budget surpluses, while economic booms lead to smaller deficits or larger surpluses. A requirement that the budget be balanced each and every year would prevent these automatic stabilizers from working and would worsen the severity of economic fluctuations.

Some supporters of the balanced budget amendment like to argue that, since households must balance their own budgets, the government should too. But this analogy between household and government behavior is severely flawed. Most households do not balance their budgets every year. Some years households borrow to buy houses or cars or to pay for medical expenses or college tuition. Other years they repay loans and save funds in retirement accounts. After retirement, they withdraw and spend those savings. Also, the government is not a household for many reasons, one of which is that the government has macroeconomic responsibilities. The argument of Keynesian macroeconomic policy is that the government needs to lean against the wind, spending when times are hard and saving when times are good, for the sake of the overall economy.

There is also no particular reason to expect a government budget to be balanced in the medium term of a few years. For example, a government may decide that by running large budget deficits, it can make crucial long-term investments in human capital    and physical infrastructure    that will build the long-term productivity of a country. These decisions may work out well or poorly, but they are not always irrational. Such policies of ongoing government budget deficits may persist for decades. As the U.S. experience from the end of World War II up to about 1980 shows, it is perfectly possible to run budget deficits almost every year for decades, but as long as the percentage increases in debt are smaller than the percentage growth of GDP, the debt/GDP ratio will decline at the same time.

Nothing in this argument should be taken as a claim that budget deficits are always a wise policy. In the short run, a government that runs a very large budget deficit can shift aggregate demand to the right and trigger severe inflation. Additionally, governments may borrow for foolish or impractical reasons. The Macroeconomic Impacts of Government Borrowing will discuss how large budget deficits, by reducing national saving, can in certain cases reduce economic growth and even contribute to international financial crises. A requirement that the budget be balanced in each calendar year, however, is a misguided overreaction to the fear that in some cases, budget deficits can become too large.

No yellowstone park?

The federal budget shutdown of 2013 illustrated the many sides to fiscal policy and the federal budget. In 2013, Republicans and Democrats could not agree on which spending policies to fund and how large the government debt should be. Due to the severity of the recession in 2008–2009, the fiscal stimulus, and previous policies, the federal budget deficit and debt was historically high. One way to try to cut federal spending and borrowing was to refuse to raise the legal federal debt limit, or tie on conditions to appropriation bills to stop the Affordable Health Care Act. This disagreement led to a two-week shutdown of the federal government and got close to the deadline where the federal government would default on its Treasury bonds. Finally, however, a compromise emerged and default was avoided. This shows clearly how closely fiscal policies are tied to politics.

Key concepts and summary

Balanced budget amendments are a popular political idea, but the economic merits behind such proposals are questionable. Most economists accept that fiscal policy needs to be flexible enough to accommodate unforeseen expenditures, such as wars or recessions. While persistent, large budget deficits can indeed be a problem, a balanced budget amendment prevents even small, temporary deficits that might, in some cases, be necessary.

Questions & Answers

what is scarcity
Bonny Reply
what is demand
Sophia Reply
demand means that's good demand according to your needs is called demand
Bonny
needs of people ar called demand
Francis
what's the difference between opportunity cost and production possibility curve?
Francis
apportunity cost means a goods which can be replace by other goods without any ease of saticfaction
Bonny
what is economocs
Bonny Reply
Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
Abubakari
It deals with making choices in the face of scarcity
Abu
what is perfect complements?
Bilal Reply
explain the return to scale with the help of mathematical expression
Bilal
what is scarcity
Bonny
difference between fixed policy and monetary policies
Doris Reply
explain why the ppc curve slopes downward?
Osei Reply
As you shift you attention to producing more of one good the graph will represent the trade-off of of the limitations of time or resources producing one verses the other good. The first 2 end points represent that you are using all your resources to only produce one good.
Sean
what is perfect complements?
Bilal
determination of perfect competition
Mumbere Reply
How can economics be important to us
Obed Reply
how can economics be important to us
Winny
economics is important on expenditure analysis
Umar
because it is to make choice
Puosour
Economics also provide the individuals the opportunity to make significant contributions to make social and economic development in their country
Sarah
Economic is important because of the fact of scarcity and desire for efficiency...
Ernest
it enable us to make rational choice
Osman
what is unemployment
scor
unemployment occurs when a person is actively searching for employment is unable to find work .....
Fatema
unemployment occurs when an individual is willing and capable to work but is unable to attain a job.
Lintoya
It is important because economics provide solutions about scarcity.
Pobreng
which of the following measures will the government take during inflation?
Ally
Price falls and demand is inelastic Please define it with an example and diagram.
Muhammad Reply
difference between nominal gdp and real gdp
Sakshi Reply
main is adjustment for inflation
cleophas
what are the factors of production
Sheku Reply
capital, labor, technology
Lucas
is economic a science
Emmanuel Reply
as economic a science
Emmanuel
yes because it study human behavior
Ahmed
yes it deal with human activity and the welfare of people in the country
Nsobila
yes because it uses scientific methods of solving problems
Osman
yes
Sarah
yes because it uses scientific methods in solving problems
Sarah
pls can I ask a question
Sarah
yes
Nyakeh
Pls what are the characteristics of opportunity costs
Sarah
identify the type of price elasticity of demand
Mamie
economic is a science
Azeez
what is monopoly
Issah
Is Economics a Science
Albert Reply
what is scarcity
Edmore Reply
Scarcity is the limitedness of resources relative to human wants. In economic sense means that the available resources are not sufficient to satisfy all human wants.
Innocent
Moreover, Fiscal policy deal with government revenue and expenditure. Government expenditure puts money in public hands while government revenue withdraws the money. Role of fiscal policy is to reduces money circulation as a means of reducing demand.
Innocent
What is an inflationary spiral?
Innocent
Suppose that you 're nominated as a Minister of Finance in your country's. How can you finance a deficit budget?
Innocent
is economic a science
Emmanuel
yes because we studying human behaviour
Umar
what are the factors of production
Sheku
pls Emmanuel adjei do we know each other
Hawa
Emmanuel adjei pls did u attend living God school
Hawa
Can you explain the terms 'fiscal deficit' and 'fiscal policy'?
Brahmani Reply
fiscal deficit refers to the government expenditure exceed expected to the government revenue
Innocent
fiscal deficit is like budget deficit
Innocent
fiscal policy it occurs when the government takes and maintain the strategic to resolve the inflation.
Innocent

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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